Never Pay More Than 40% To Settle An Old Debt

Category: Finance, Credit.

If you have bad credit, the first thing you need to do is go back and start paying off your old debts, right?

While there are some circumstances where it is in your best interest to pay off collection accounts, there are also some circumstances where it is in your best interest NOT to pay. Wrong! First, let us talk about when you should pay off debts that have been passed to a collection agency. Not paying could lead to a lawsuit. Assuming that the debt is yours and has been validated, you should pay off debts that have been placed into collections recently. Worse yet, your past- due account could be sold to collection agency after collection agency resulting in a negative entry on your credit report each time.

But that does not mean that you should pay the full amount. Under these circumstances, you should pay. With the exception of student loans and child support, you can settle your debt for 35 to 65% of the balance owed. Why? If your debt is older than four years old, it is probably in your best interest not to pay. Statutes of limitations run out in most states after four years.

Old debts do not carry as much weight on your credit report as new debts. This means that you can no longer be sued for the debt. You might not be doing yourself a favor by paying off past debts. This is because new collection accounts have more of an impact on your score than old accounts. In fact, paying off an old debt could cause your credit score to go down. When you pay off an old account, the date of last activity is made current which makes the old debt look like a new collection account. Only if you can settle them for substantially less than the balance owed.

Should you ever settle accounts that are more than four years old? Never pay more than 40% to settle an old debt. If you make any type of payment or agreement, no matter how small, the statute of limitations starts over again. Be careful and never agree to any repayment plan unless you are absolutely certain that you will and can follow through with it. Do not get trapped into thinking that you have to pay off your debts entirely to repair your credit. Collection agencies know this.

In many cases, it is not in your best interest to settle. That is why they are so willing to settle your debt for pennies on the dollar. Do not take their first offer at face value. Keep in mind, that they are, though going to try to recoup as much of the debt as they can. If your debt is older than four years, you have the power. But do not give up without a fight. If it is less than four years, they do.

Many collection agencies will settle a new debt at a reasonable price.